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Home Publications Blogs Beat the Press Larry Summers' Poor Memory on the IMF

Larry Summers' Poor Memory on the IMF

Friday, 09 December 2011 06:35

Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF's role in the world economy. In an oped column he told readers that:

"From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations."

This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.

It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin's strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.

This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers' assertion that the IMF puts countries on a sustainable course.

In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post's opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers. 

Comments (8)Add Comment
East Asian Crisis
written by JSeydl, December 09, 2011 6:30
This is good stuff. Much of today's problems in the US and around the world date back to the East Asian crisis. The strengthing of the dollar during this period put enormous trade imbalances into the global economy, which still exist today. A serious policymaker would be talking about unwinding those imbalances, not searching for the next asset bubble to inflate. Of course, a serious proposoal would require a weakening of the dollar and higher than normal inflation in the US, which according to everyone brainwashed by the media is "Bad Bad Bad!!" When in reality, such a policy would be advantageous to not only the US, but also to the rest of the world.
First Law of Economics: Free Markets Require a Benevolent Dictator
written by izzatzo, December 09, 2011 6:41
But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations."

Exactly. As Milton Friedman said, free market capitalism is not compatible with democratic politics. It requires a benevolent dictator like Larry Summers to thrive. Just look at Hong Kong.

Stupid liberals.
written by Glen, December 09, 2011 8:35
here is an interesting graph showing the link between housing prices and the current account deficit

interesting graph ...
written by David, December 09, 2011 10:35
that is interesting. Is it merely correlation or causation? It looks like causation due to the CAD shadowing housing prices. Conjecture: most borrowing is financed via collateral as real estate: booming house prices funds borrowing for "investment" which for the US (due to its trade structure) translates into deficit.
written by Ron Alley, December 09, 2011 10:41

Loved your succinct description of the actions taken by Sumers.
it is not striking.
written by trish, December 09, 2011 11:15
" It is striking that the Post's opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers."

This seems to me to be the only inaccurate thing in your column. It is simply not striking anymore.

Captured MSM corporate hacks.
written by kharris, December 09, 2011 12:51
Glen's chart extends the causal chain from the Western (US and IMF) reaction to the Asia debt crisis to the mortgage bubble. Once you've established a causal link with the mortgage bubble, you also have a causal connection to the mortgage and housing market collapse, the financial crisis, millions of lost US jobs and the current trouble in the Eurozone. If our policies had not been draconian when Asia needed help, Asia very likely would not have decided to run up reserves. Imbalance leads to imbalance, and then the correction of one imbalance urges all the other imbalances to correct.

And let's not forget that Geithner was in on the deal when Asia was denied help on a reasonable basis.
written by vorpal, December 09, 2011 2:44
Dean, I put a long response to your earlier comment on efficient cars. It's good, it's respectful, and I hope you read it.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.